Question

Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2020, in exchange for $6,039,000 in cash. Allison intends to maintain Mathias as a wholly owned subsidiary. Both companies have December 31 fiscal year-ends. At the acquisition date, Mathias’s stockholders’ equity was $2,040,000 including retained earnings of $1,540,000.

At the acquisition date, Allison prepared the following fair-value allocation schedule for its newly acquired subsidiary:

Consideration transferred					$	6,039,000
Mathias stockholders' equity						2,040,000
Excess fair over book value					$	3,999,000
to unpatented technology (8-year remaining life)	$	864,000
to patents (10-year remaining life)		2,580,000
to increase long-term debt (undervalued, 5-year remaining life)		(140,000	)			3,304,000
Goodwill					$	695,000

Postacquisition, Allison employs the equity method to account for its investment in Mathias. During the two years following the business combination, Mathias reports the following income and dividends:

	Income		Dividends
2020	$	465,000	$	25,000
2021		930,000		50,000

No asset impairments have occurred since the acquisition date.

Individual financial statements for each company as of December 31, 2021, follow. Parentheses indicate credit balances. Dividends declared were paid in the same period.

	Allison				Mathias
Income Statement
Sales	$	(6,560,000	)		$	(3,940,000	)
Cost of goods sold		4,612,000				2,526,000
Depreciation expense		915,000				301,000
Amortization expense		450,000				115,000
Interest expense		71,000				68,000
Equity earnings in Mathias		(592,000	)			0
Net income	$	(1,104,000	)		$	(930,000	)
Statement of Retained Earnings
Retained earnings 1/1	$	(5,420,000	)		$	(1,980,000	)
Net income (above)		(1,104,000	)			(930,000	)
Dividends declared		560,000				50,000
Retained earnings 12/31	$	(5,964,000	)		$	(2,860,000	)
Balance Sheet
Cash	$	87,000			$	155,000
Accounts receivable		990,000				245,000
Inventory		1,780,000				825,000
Investment in Mathias		6,683,000				0
Equipment (net)		3,780,000				2,080,000
Patents		115,000				0
Unpatented technology		2,165,000				1,490,000
Goodwill		453,000				0
Total assets	$	16,053,000			$	4,795,000
Accounts payable	$	(889,000	)		$	(235,000	)
Long-term debt		(1,000,000	)			(1,200,000	)
Common stock		(8,200,000	)			(500,000	)
Retained earnings 12/31		(5,964,000	)			(2,860,000	)
Total liabilities and equity	$	(16,053,000	)		$	(4,795,000	)

Required:

1. Determine the fair value in excess of book value for Allison's acquisition date investment in Mathias.

2. Prepare a worksheet to determine the consolidated values to be reported on Allison’s financial statements.

Answer 1

a) Fair Value in excess of book value is already given in the question, reproduced below:-

Consideration transferred					$	6,039,000
Mathias stockholders' equity						2,040,000
Excess fair over book value					$	3,999,000
to unpatented technology (8-year remaining life)	$	864,000
to patents (10-year remaining life)		2,580,000
to increase long-term debt (undervalued, 5-year remaining life)		(140,000	)			3,304,000
Goodwill					$	695,000

b) Worksheet to determine the consolidated values to be reported on Allison’s financial statements.

ALLISON CORPORATION AND CONSOLIDATED SUBSIDIARY
Consolidation Worksheet
For Year Ending December 31, 2021
			Consolidation Entries
	Allison	Mathias	Debit	Credit	consolidated
Income Statement
Revenues	(6,560,000)	(3,940,000)			(10,500,000)
Cost of goods sold	4,612,000	2,526,000			7,138,000
Depreciation expenses	915,000	301,000			1,216,000
Amortization expenses	450,000	115,000	366,000		931,000
Interest expense	71,000	68,000		28,000	111,000
Equity earnings in Mathias	(592,000)	-	592,000		-
Net income	(1,104,000)	(930,000)			(1,104,000)
Statement of Retained Earnings
Retained earnings 1/1	(5,420,000)	(1,980,000)	1,980,000		(5,420,000)
Net income (above)	(1,104,000)	(930,000)			(1,104,000)
Dividends declared	560,000	50,000		50,000	560,000
Retained earnings 12/31	(5,964,000)	(2,860,000)			(5,964,000)
Balance Sheet
Cash	87,000	155,000			242,000
Accounts receivable	990,000	245,000			1,235,000
Inventory	1,780,000	825,000			2,605,000
Investment in Mathias	6,683,000	-	50,000	6,733,000	-
Equipment (net)	3,780,000	2,080,000			5,860,000
Patents	115,000	-	2,322,000	258,000	2,179,000
Unpatented technology	2,165,000	1,490,000	756,000	108,000	4,303,000
Goodwill	453,000	-	695,000		1,148,000
Total assets	16,053,000	4,795,000			17,572,000
Accounts payable	(889,000)	(235,000)			(1,124,000)
Long-term debt	(1,000,000)	(1,200,000)	28,000	112,000	(2,284,000)
Common stock	(8,200,000)	(500,000)	500,000		(8,200,000)
Retained earnings 12/31	(5,964,000)	(2,860,000)			(5,964,000)
Total liabilities and equity	(16,053,000)	(4,795,000)	7,289,000	7,289,000	(17,572,000)